Dubai banks lead in profit growth as bad-debt burden lightens

Dubai banks were the stars of the first quarter’s earnings season, as they reduced their provisions for losses on loans related to Dubai government entities.

While most UAE banks turned a profit in the quarter, even despite the lower price of oil, it was the banks in Dubai that set the pace.

“Dubai banks stood out versus Abu Dhabi banks in general on operational growth,” said Taher Safieddine, an analyst at the Dubai-based investment bank Shuaa Capital.

Emirates NBD even moved ahead of Abu Dhabi’s FGB for the sector’s biggest first quarter profit at Dh1.67 billion versus Dh 1.42bn for the latter.

A year earlier, FGB had profit of Dh1.33bn compared with Emirates NBD’s Dh1.04bn.

Emirates NBD attributed its 60 per cent profit rise to ebbing exposure to bad debt from government-related entities in the emirate. The lender also boosted its fee income from credit cards and customer remittances at a time when low interest rates are compressing bank margins.

Meanwhile, FGB’s 7 per cent profit increase fell short of analyst estimates.

“The Dubai banks have the extra leg to play, especially Emirates NBD. Provisions at Emirates NBD are getting lower and will go lower. The provisions at Dubai banks are going lower because they are at a different cycle. Emirates NBD came later in the cycle in terms of cleaning up its books,” Mr Safieddine said.

Emirates NBD’s impaired loan ratio dropped last year to 7.8 per cent from 13.9 per cent in 2013 after reclassifying Dubai World debt exposure as performing. Dubai World has won unanimous creditor approval to repay some of its loans ahead of schedule and extend payments for another chunk of debt.

The bank had the biggest exposure among financial institutions to Dubai World, which had triggered the financial crisis in 2009 when it said it would freeze payments on US$25bn worth of debt. In January, Dubai World said it had agreed to a $14.6bn debt restructuring.

Most UAE banks came out of the first three months profitable. Concerns that the lower price of oil would dampen profitability proved unfounded, as the country’s economy has shown that it is now not completely reliant on the commodity. Crude prices have dropped about 50 per cent in the past year.

While analysts say it is too early to tell what the longer-term impact lower oil prices will have on the ability of banks to make money, especially if prices remain subdued for a long time, they say that banks have so far been able to weather the storm by generating more money from fees.

As part of that strategy, banks are getting more recurrent income through things such as advisory services, trade finance, capital markets, insurance and brokerage operations.

And because the margins the banks get from loans have become compressed, they are focusing on generating income from parts of their business such as individual customers and small- and medium-sized enterprises, where they can charge higher interest rates because of the elevated risk. Banks have also been expanding abroad to bolster their balance sheet and find new ways to make money as the home market becomes crowded.

“It was very reassuring to see during the first quarter that earnings growth continues to be strong, driven by loan growth and lower provisioning,” said Shabbir Malik, a Dubai-based bank analyst at the Egyptian investment bank EFG-Hermes.

“For me it shows that the drop in oil prices hasn’t really affected profitability yet. This momentum should carry over into the second quarter as loan growth guidance remains pretty much intact and as provisioning of certain banks continue to ease.”

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